How to Admit You’re Wrong (Like a Central Banker)

23.11.2016 • Central Banks

From Nick O’Connor – Capital & Conflict (Great Britain) –

I’ll be quick this morning as I’m preparing for a big event later on this afternoon.

I’ve gathered our key experts – Charlie Morris, Tim Price, Eoin Treacy and Akhil Patel – together for a kind of “2017 wealth summit”. The idea is we discuss the most pressing threats and opportunities for private investors and what you can do about them. I’ll be sharing their insights with you later in the week. So look out!

I’ll be asking Akhil about his controversial idea on the property market. It’s an idea that seems to have really resonated with Capital & Conflict readers. If he’s right, we’re at the start of a huge property bull market right here in the UK. I’ll be asking Akhil to explain – and indeed defend – that idea later. You can get the full story on it by following this link now.

But first, on to slightly more pressing news.

The last two weeks – since Donald Trump’s election – we’ve been looking at the new trends in the financial system. Rising inflation expectations and falling bond prices have been the dominant trends.

Another is the idea that monetary policy – repressively low/negative interest rates, quantitative easing (QE), and other schemes dreamed up by central bankers – is changing. In its place we’ll see increasing government spending. Fiscal policy is going to make a comeback in the form of some kind of infrastructure boom. Or so the theory goes.

Today at 12.30pm we’ll get our first small indication as to whether that’s true. Today is the Autumn Statement. It’s the first chance Teresa May’s government has had to lay out its financial priorities.

If what we’re seeing is a worldwide move away from reliance on central bank stimulus, to more direct government spending in the economy, you’d expect to see some sign of that today. A UK government infrastructure boom wouldn’t be as significant globally as a US one. But it still matters – both as potentially the start of a trend and something that’ll reinforce rising inflation expectations.


How to admit you’re wrong like a central banker

First, it’s worth noting just how badly some of the monetary policy decisions we’ve seen over the past year or so have gone.

Take negative interest rates. By now you’re familiar with the story. The whole idea of negative rates is to make it more likely that people will spend their money. It’s an incentive against saving.

That’s because, if you squint your eyes and look at the world like a central banker, people saving money for the future is bad for the economy. What’s good for the economy is people spending or investing. (Or even better – borrowing!)

So we get negative rates. Have they worked? Not if numbers from Europe’s biggest debt collector, Intrum Justitia, are to be believed. Despite negative rates across the continent, it found that 69% of Europeans still put their savings in regular bank accounts.

Mikael Ericson, chief executive officer of the firm, gave his view on why that is: “After the financial crisis, people have felt a need – even if they have small means – to create some kind of security. It can’t be that people save in a bank account because of the fantastic returns, so it must be about a sense of security, of having money in the bank.”

I’d argue it’s even more than that. Negative rates are a sign something is wrong in the system. That scares people. That fear leads them to becoming more conservative and actually saving more than they would otherwise.

It serves to underline a fundamental point: you can try to manipulate the markets, but you can’t predict people’s psychological and emotional responses to your actions. And really an economy is driven on by those responses – how people feel is as important as the measurable data. Animal spirits vs rational actors, etc.

If you saw Eoin Treacy’s note yesterday (read it here if not), you’ll know that he believes negative rates have been bad for the financial system as a whole and now central bankers are looking for a way out.

Government spending – things like the Autumn Statement – is a chance to do that. So look out for an indication that the government is raising spending again. Particularly look out for any infrastructure finance initiative – any way in which central bank stimulus can be funnelled into government spending directly in the economy.

We may not quite get that. But that’s what I’ll be looking out for – any small move could be a signal of a much more significant move to come in the future (and across the Atlantic).

I’ll be asking all of our experts about this very idea later today. Check back in tomorrow to see what they said.


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